Paris: Within a broad agreement at the European Central Bank on the need to raise interest rates further are enduring preferences among some officials for another big hike.
Remarks in the runup to this week’s International Monetary Fund Spring Meetings had focused increasingly on the most forceful bout of monetary tightening in ECB history nearing its conclusion “- a process likely hastened by bank failures in the US and Switzerland.
But while policymakers speaking in Washington acknowledged the threat to credit and economic expansion from the recent financial-sector turbulence, there was also optimism that the euro zone may escape relatively unscathed.
That would allow the ECB’s full attention to shift back to inflation, particularly underlying price pressures that are almost three times the 2 per cent goal and gathering pace.
Belgian central bank chief Pierre Wunsch described a “strong consensus” that borrowing costs must be lifted further, with the choice at next month’s meeting probably being between a 25 or a 50 basis-point step.
Another “bad reading” for core inflation, which omits energy and food costs and is at an all-time high, could tilt the decision toward the larger increment, he said.
There was indeed widespread backing for the view that the ECB’s deposit rate, currently at 3 per cent following 350 basis points of hikes since last summer, must rise more.
Bundesbank President Joachim Nagel stressed that “there’s still a way to go,” while Lithuania’s Gediminas Simkus said the ECB “is not done.”
While they insisted it was too soon to discuss the size of the next move, others were more forthright: Austria’s Robert Holzmann “- probably the most-hawkish of the Governing Council’s 26 rate-setters “- said a half-point increase “could be in the ballpark” for May, citing the persistence of core inflation.
Europe emerging from the banking mess without major damage would support such an outcome “- something some officials consider possible, even if the IMF is gloomier.
“It’s difficult to disentangle the impact of tighter monetary policy from concerns about the banking sector,” Slovenia’s Bostjan Vasle said. “But the impact of the Credit Suisse situation on bank lending in the euro area is probably marginal.”
His Estonian counterpart, Madis Muller, was similarly sanguine.
“There’s no reason for us to assume at this point that the banking turmoil in the US and Switzerland is changing the outlook for the euro area,” he said. “We have to be vigilant, but at this point there’s no reason to change our monetary-policy path.”
Bets by money-market investors, who pared wagers on where the deposit rate will peak as the banking tensions unfolded, remain closer to a quarter-point hike on May 4, though they’ve ticked up in recent days.
Mario Centeno, who heads Portugal’s central bank, led pushback against a bigger move, saying the choice should be a 25 basis-point increase or a pause.
“I don’t see any reason whatsoever to do more,” he told Bloomberg. “We target headline inflation “- we don’t target core.”
Italy’s Ignazio Visco struck a similar tone, arguining that the lagged effects of tightening to date are still materializing.
“Uncertainty is very high and we have to be very cautious,” he told CNBC. “We have to show that we are determined but also patient.”
As officials have gone to great lengths to highlight, economic data will be the key determinant of the ECB’s next rate decision. On top of inflation figures for April, they’ll be much to chew over before than “- including releases on bank lending and economic growth from across the 20-nation euro area.
The coming days will also bring speeches from top officials who didn’t comment publicly in Washington, such as Chief Economist Philip Lane and Executive Board member Isabel Schnabel.
ECB President Christine Lagarde will speak, too “- perhaps offering investors clues on the kind of consensus that’s emerging among her colleagues.